The Real Deal Los Angeles

The Real Deal Los Angeles

Mall landlords are tightening screws on non-anchor tenants

Amid the American mall's decline, owners want to eliminate clauses allowing smaller tenants to ditch a lease if an anchor exits

July 06, 2018 10:00AM

(Credit: Wikimedia Commons)

The exodus of anchor tenants from America’s malls has landlords rethinking a lease clause that is popular with smaller tenants.

Owners have traditionally granted smaller tenants co-tenancy clauses, allowing the businesses to exit a lease if a major anchor store like Macy’s or J.C. Penney departs the mall. But that may be changing.

The steady exodus of anchor tenants at malls nationwide in recent years has landlords pushing to eliminate those clauses to stop the bleeding, according to Bloomberg.

The co-tenancy clauses were historically a low-risk for landlords and provided smaller tenants with an out should the larger stores go bust. But with the continued rise of e-commerce, American malls have been decimated. In Chicago, anchor space vacancies are at all-time highs.

Eliminating the clauses also comes with potential pitfalls. It could make existing tenants hesitant to renew a lease and potential tenants think twice about signing one, according to Kent Percy, a managing director at the New York-based consulting firm AlixPartners.

“[Landlords] could lose the whole inside of the mall” if they refuse to sign co-tenancy clauses, he said.

Tenants also have some leverage in the down market. The need for tenants can give them room to negotiate shorter leases and lower rents. They could also sign co-tenancy leases for only certain anchor tenants, which may be more amenable to landlords provided those anchors are in good financial shape, according to Bloomberg. [Bloomberg]— Dennis Lynch